Appellate Review of Remand Orders: A Substantive/Jurisdictional Conundrum

• Author: Thomas C. Goodhue
• Position: J.D. Candidate, The University of Iowa College of Law
• Pages: 04

Thomas C. Goodhue: J.D. Candidate, The University of Iowa College of Law, 2006; B.A., Haverford College, 2003.

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I Introduction

For over a century, commentators have treated the statutory bar on appellate review of remand orders as a measure necessary to limit docket congestion. During that time, however, the courts have crafted numerous exceptions to the statutory bar. These exceptions seem to operate differently from case to case, resulting in appellate review for some litigants' remand orders, but not those of other litigants. To bring more certainty to this area of law and to increase fairness to all litigants, courts need to develop a uniform way of deciding whether to grant remand orders.

Appellate review of remand orders is not a mere procedural technicality, as the review of such orders can delay litigation in state courts. Notwithstanding this significant effect, a recent Seventh Circuit decision that broke with other circuits would construct yet another procedural hurdle for shareholder plaintiffs in class-action, securities-fraud litigation.¹

To illustrate, assume that an investment group fraudulently sells securities to hundreds of investors, and the investors collectively lose millions of dollars.² To recoup their losses, investors file a class-action lawsuit in state court, claiming fraud. In an attempt to slow down the litigation process, the defendant investment company immediately removes the case to federal court pursuant to special legislation. The court finds that removal is unauthorized and remands the case to state court. Generally, this remand is final, and the lawsuit could proceed in state court.³

But the Seventh Circuit would treat investors differently than practically every other group of federal litigants. It held that appellate review of remand orders granted under the Securities Litigation Uniform Standards Act ("SLUSA") is authorized.⁴ In effect, the Seventh Circuit created another tool for defendants to make shareholder suits more difficult, costly, and time-consuming. The Seventh Circuit's controversial decision creates a circuit split on the issue of whether remand orders granted under SLUSA Page 1322 are subject to appellate review; and, perhaps more ominously, the decision further confuses the law concerning appellate review of remand orders.⁵

This Note uses the circuit split over SLUSA as a lens through which to examine appellate review of statutory remand orders. This approach is taken for two reasons. First, the circuit split illustrates the broader issues of appellate review of remand orders. Second, the debate over appellate review of remand orders has been, to date, largely abstract.⁶ By focusing on the application of appellate review to SLUSA, this Note demonstrates some of the practical implications of a procedural issue.⁷

Part II discusses the background of appellate review of remand orders and SLUSA. Part III analyzes the circuit split over appellate review of SLUSA remand orders, and Part IV places this split within a larger framework. Part V argues that appellate review of SLUSA remand orders is unauthorized under current removal laws. It proposes a new test, the statutory remand test, for appellate courts to use in determining when a remand is subject to appellate review. Part v. addresses the implications of this test by looking at the test's likely effect upon securities class actions and on the federal court system.

II Background

A Removal And Remand

Removal is governed by 28 U.S.C. ß 1441.⁸ This statute provides that when an action having concurrent state and federal jurisdiction is brought in state court, the defendant can remove the action to federal court.⁹ This happens primarily in two types of actions: those involving a federal Page 1323 question,¹⁰ and those in which the parties to the dispute are from different states and the amount in controversy exceeds $75,000.¹¹

To remove an action, a defendant must follow the procedures in 28 U.S.C. ß 1446.¹² Specifically, the defendant must, within thirty days of receipt of the initial pleading, file a notice of removal in the federal district court to which the action is to be removed.¹³ This notice must contain a statement of the grounds upon which the defendant is removing the case.¹⁴ Within thirty days of filing of the notice of removal under ß 1446(a), the plaintiff may file a motion to remand the case; that is, to send the case back to state court.¹⁵

Courts generally grant remand orders for only a few reasons. Sometimes a federal court remands a case because the defendant has failed to follow the correct removal procedures.¹⁶ Other times, the federal court may lack subject matter jurisdiction to hear a case because the parties to the litigation are not diverse, and the case contains no federal issue.¹⁷ Also, as with SLUSA, a particular statute may outline specific instances in which the federal court must remand.¹⁸

This is significant because of the potential impact that removal can have on litigation. By removing a case to federal court, defendants can change judges, potential biases, and rules of procedure; and removing a case might improve a defendant's chances of victory.¹⁹ One study has found that if a plaintiff had a fifty-percent chance of winning a diversity case in state court, then that chance would fall to thirty-nine percent in federal court.²⁰ Thus, Page 1324 removal and remand are important tools because they cause a change in forum.²¹

1. Appellate Review of Remand Orders

Appellate review of remand orders has an idiosyncratic history. Removal from state courts to federal courts has existed in various statutory forms since at least the Judiciary Act of 1789.²² Remand has a less documented history, but in 1875, Congress formally authorized appellate review of remand orders.²³ Only twelve years later, Congress repealed that portion of the 1875 Act and thereby barred review of remand orders at the appellate level.²⁴

Thus, if a federal court remanded a case to state court, no one could appeal that remand order.²⁵ It was final. There is little legislative history indicating why Congress disallowed appellate review of remand orders, but historical accounts indicate that federal dockets were severely overcrowded at this time because of the explosion of legislation accompanying the Reconstruction.²⁶

The statutory bar against appellate review of remand orders has existed ever since.²⁷ In its current form, the rule states that "[a]n order remanding a case to the [s]tate court from which it was removed is not reviewable on appeal or otherwise."²⁸ There are built-in exceptions for cases involving particular civil-rights claims.²⁹ In 2005, Congress also passed a bill that Page 1325 authorized appellate review of remand orders granted in certain class-action lawsuits (although not those class actions that are based on securities claims).³⁰ Along with these congressionally mandated exceptions to the statutory bar, courts have adopted increasingly liberal interpretations of the bar against appellate review in recent decades.³¹

2. The Waco Exception

In the twentieth century, courts have created two exceptions to the statutory bar against appellate review. First, in City of Waco, Texas v. United States Fidelity & Guaranty Co., an individual sued the City of Waco, Texas, in state court for the City's negligent maintenance of a road.³² The City cross- claimed against Fidelity Company ("Fidelity"), a Maryland resident, and Fidelity removed the case to federal court based on diversity jurisdiction.³³The federal district court then dismissed the claim against Fidelity.³⁴ After doing so, the court no longer had diversity jurisdiction; accordingly, the court remanded the case to state court.³⁵

The City appealed the order dismissing its claim against Fidelity to the Fifth Circuit.³⁶ This appeal put the circuit court in a predicament. Orders dismissing parties from cases were subject to appellate review; but the trial Page 1326 court had remanded the case, and a remand order was not subject to appellate review. The Fifth Circuit provided a unique solution: it dismissed the appeal because it lacked jurisdiction to hear it, but at the same time, instructed the state court to reinstate the claim against Fidelity.³⁷ The rationale of the court's decision was mysterious. If the court did not have jurisdiction to hear the appeal, then how did it have the authority to reinstate the claim against Fidelity?

Since the legitimacy of the order dismissing Fidelity was in question, the Supreme Court granted a writ of certiorari and framed the issue in terms of timing. The Court reasoned that the district court dismissed the third-party claim before it remanded the case.³⁸ Since, at that point, the case had not been remanded, the appellate court could review the order dismissing the third-party claim.³⁹

After being virtually forgotten for fifty years, the Ninth Circuit revived Waco in Pelleport Investors, Inc. v. Budco Quality Theatres, Inc.⁴⁰ In that case, an action was brought in the California Superior Court and removed to federal court.⁴¹ The two parties had previously signed a forum-selection clause agreeing to litigate disputes before only the California Superior Court.⁴²Although diversity jurisdiction existed, the federal court remanded the action to the California Superior Court because of the forum-selection agreement.⁴³...